CFA Level 1: Quantitative Methods Test || With 100% Accurate Solutions
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CFA - Chartered Financial Analyst
Institution
CFA - Chartered Financial Analyst
CFA Level 1: Quantitative Methods Test || With 100% Accurate Solutions
CFA Level 1: Quantitative Methods Test || With 100% Accurate Solutions
What do I use when I want to assign every member of a group of size n to n slots? - ANSWER - n factorial.
What do I use when I want to count the numbe...
,CFA Level 1: Quantitative Methods Test
|| With 100% Accurate Solutions
What do I use when I want to assign every member of a group of size n to n slots? -
ANSWER - n factorial.
What do I use when I want to count the number of ways to apply one of three or
more labels to each member of a group? - ANSWER - Multinomial.
What do I use when I want to count the number of ways I can choose r objects from
n, when the order in which I list the r objects does not matter (can I give the r objects
a label)? - ANSWER - Combination.
What do I use when to count the number of ways I can choose r objects from a total
of n, when the order in which I list the r objects is important? - ANSWER -
Permutation.
What do the computation/permutation/etc formulas apply to? - ANSWER - Tasks
with a finite number of possible outcomes.
What is the covariance of a random variable with itself? - ANSWER - Its own
variance.
What places the upper limit on bond price? - ANSWER - The discount rate.
What assumptions does binomial distribution make? - ANSWER - Probability, P, is
constant for all trials and trials are independent.
When is binomial distribution symmetric? - ANSWER - When probability of success
on a trial = .5
If you are paying a fair price on average with a broker, what should be the probability
of a profitable trade? - ANSWER - .5
Difference between ordinary annuity and annuity due? - ANSWER - Annuity due has
first cash flow that occurs immediately while ordinary annuity has first cash flow that
occurs one period from now.
future value annuity factor
Also need to know PV annuity for ordinary annuity and annuity due
perp formula
Solve for interest rate and growth rate
annual compounding periods needed to reach a value
calculate size of payment annuity
calculate amount needed now to fund future annuity
calculate lump sum annuity - ANSWER - FV=A[(1+r)^n - 1 / r]
Cash flow additivity principle - ANSWER - the idea that amounts of money indexed
at the same point in time are additive
Working capital management - ANSWER - Management of the company's short-term
assets and short-term liabilities.
Steps in computing and applying NPV Rule - ANSWER - 1) Identify all cash flows
associated with the investment—all inflows and outflows.1
2) Determine the appropriate discount rate or opportunity cost, r, for the investment
project.2
3) Using that discount rate, find the present value of each cash flow. (Inflows have a
positive sign and increase NPV; outflows have a negative sign and decrease NPV.)
4) Sum all present values. The sum of the present values of all cash flows (inflows
and outflows) is the investment's net present value.
5) Apply the NPV rule: If the investment's NPV is positive, an investor should
undertake it; if the NPV is negative, the investor should not undertake it. If an
investor has two candidates for investment but can only invest in one (i.e., mutually
exclusive projects), the investor should choose the candidate with the higher positive
NPV.
What is the IRR? - ANSWER - The discount rate that makes the NPV = 0.
What is necessary to recognize a compound rate of return that is equal to the IRR
over the life of the investment? - ANSWER - Only if we can reinvest all interim cash
flows at exactly the IRR.
IRR Rule - ANSWER - uses the opportunity cost of capital as a hurdle rate, or rate
that a project's IRR must exceed for the project to be accepted. Note that if the
opportunity cost of capital is equal to the IRR, then the NPV is equal to 0. If the
project's opportunity cost is less than the IRR, the NPV is greater than 0.
IRR Formula
Investment - ANSWER - CF/Investment
CF/IRR
What do IRR and NPV rule do when projects are independent? - ANSWER - Give
same accept or reject decision.
When does NPV and IRR rank projects differently? - ANSWER - When they don't
have enough money to do all of them and must rank them in terms of profitability.
The IRR and NPV rank differently when:
1) the size or scale of the projects differ.
2) timing of the projects' cash flows differ.
What do you follow when NPV and IRR are different? - ANSWER - NPV
, - it represents addition to shareholder wealth, and we take the basic goal of a
company to be to make shareholders money.
Three ways interest rates can be thought of - ANSWER - First, they can be
considered required rates of return—that is, the minimum rate of return an investor
must receive in order to accept the investment.
Second, interest rates can be considered discount rates. In the example above, 5.26
percent is that rate at which we discounted the $10,000 future amount to find its
value today. Thus, we use the terms "interest rate" and "discount rate" almost
interchangeably.
Third, interest rates can be considered opportunity costs. An opportunity cost is the
value that investors forgo by choosing a particular course of action. In the example, if
the party who supplied $9,500 had instead decided to spend it today, he would have
forgone earning 5.26 percent on the money. So we can view 5.26 percent as the
opportunity cost of current consumption.
How are interest rates set in the marketplace? - ANSWER - Supply and demand
real risk-free interest rate - ANSWER - the single-period interest rate for a completely
risk-free security if no inflation were expected. In economic theory, the real risk-free
rate reflects the time preferences of individuals for current versus future real
consumption.
Inflation Premium - ANSWER - compensates investors for expected inflation and
reflects the average inflation rate expected over the maturity of the debt
Nominal Risk Free Interest Rate - ANSWER - The sum of the real risk-free interest
rate and the inflation premium. (T-bill).
Liquidity premium - ANSWER - compensates investors for the risk of loss relative to
an investment's fair value if the investment needs to be converted to cash quickly.
Maturity Premium - ANSWER - compensates investors for the increased sensitivity
of the market value of debt to a change in market interest rates as maturity is
extended, in general (holding all else equal).
Simple Interest - ANSWER - Interest rate times the principle.
Is simple or compound interest more important? - ANSWER - Compound.
Important consequence of present value and future value being separated in time? -
ANSWER - We can add amounts of money only if they are indexed at the same
point in time.
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